Recent Developments in Arizona Construction Law

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Notable 2014 Case Law:

Bonds

In Ponderosa Fire District v. Coconino County, 235 Ariz. 597 (Ct. App. Ariz. 2014), the Court of Appeals considered whether the County had discretion to decide not to call performance bonds posted by an owner/developer to ensure completion of subdivision improvements. The owner acquired a subdivision property after the developer declared bankruptcy and abandoned the subdivision. The developer had posted bonds totaling over $4 million prior to abandoning the subdivision. The County declined the new owner’s request that the County call the bonds. The owner alleged it had acquired the subdivision with the expectation the bonds would be called to pay for the remaining improvements and infrastructure. The owner requested a judgment compelling the County to call the bonds and monetary damages. The court noted that the legislative purpose of the A.R.S. § 11-821(C) was to require developers such as the new owner to pay for the cost of subdivision improvements and the County determined that calling the bonds did not serve this interest. The court held that under A.R.S. § 11-821(C) and Coconino County Subdivision Ordinance No. 82–3, the County had discretion to decide not to call performance bonds posted by an owner/developer to ensure completion of subdivision improvements.

Mechanic’s Liens

In Weitz Co., L.L.C. v. Heth, 235 Ariz. 405 (2014), the Arizona Supreme Court held that the statute which gives mechanic’s liens priority over liens recorded after construction begins on real property did not preclude assignment by equitable subrogation of a construction loan deed of trust that was recorded before construction began on the project.

In Weitz, the developer stopped paying the contractor on a condominium development. The majority of the individual units were sold to residents and the construction lender released the deed of trust with respect to those units when it was paid off by the condominium unit lenders/owners. The contractor sued the developer, individual unit owners and their lenders, to foreclose on its mechanic’s lien. The developer, unit owners and lenders asserted that because the unit owners/lenders had paid their portions of the developer’s construction loan allocated to their units, they were equitably subrogated to the construction loan lender’s deed of trust and therefore had priority over the contractor’s mechanic’s lien. The court held that A.R.S. § 33–992(A) did not preclude equitable subrogation of a lien that is superior to a mechanic’s lien.

The court also held that although a third party generally must discharge the entire lien obligation to qualify for equitable subrogation, when a single deed of trust burdens multiple parcels, a third party may be entitled to equitable subrogation when that party has paid a pro rata amount of the obligation and obtained a full release of the parcel at issue from the deed of trust.

Eminent Domain

In City of Phoenix v. Garretson, 234 Ariz. 332 (2014), the Arizona Supreme Court held that an owner who lost access rights to an abutting street when the city constructed light-rail tracks adjacent to the owner’s property, but who retained access rights to his property from another street, was nevertheless entitled to compensation from the city. The court held that a property owner is entitled to compensation if the government either completely eliminates or substantially impairs the owner’s access to an abutting road and thereby causes the property’s fair market value to decrease. However, the court also held that a landowner who claims or establishes only substantial impairment is not entitled to compensation unless the remaining access is unreasonably circuitous.

Registrar of Contractors Recovery Fund

In Magness v. Arizona Registrar of Contractors, 234 Ariz. 428 (2014), homeowners sued a contractor who was paid to construct a bath addition to a private residence. The homeowners also named the ROC, alleging they were entitled to recover from the Fund based on claimed damages for unperformed work. The contractor failed to answer the complaint and the trial court entered a default judgment and awarded damages to the homeowner. When the homeowners filed an application for an order directing payment from the Fund, the ROC objected because the application did not satisfy the statutory requirements and requested that the court, at a minimum, order a hearing requiring the homeowners to prove the requisite matters. The trial court granted the homeowners’ recovery from the Fund. In reversing the trial court’s decision, the Arizona Court of Appeals held that an applicant seeking recovery from the Fund through a civil remedy must obtain a judgment against the contractor and meet all of the remaining statutory eligibility requirements. The court reasoned that to hold otherwise would deprive the ROC of its statutory right to raise and support its objections and would improperly relieve an “injured person” of the burden of demonstrating eligibility for payment from the Fund. 

Significant Jury Verdicts

In January 2014, a jury returned a verdict of $4,104,276.00 to homeowners who filed suit against homebuilders who constructed homes in the planned community of Sun City Grand. Two hundred seventy-nine homeowners filed a lawsuit alleging the homes contained window seals that were failing, had improperly placed Low-e coating on windows, did not comply with noise ordinances concerning Luke Air Force Base, did not have code-required weep screed in the stucco systems and were improperly constructed of parapet walls, foundation systems and ceiling systems. Following a 59-day trial and eight days of jury deliberation, a jury returned a verdict in favor of the plaintiffs.  

On May 29, 2014, a jury returned a verdict of $2,188,266.00 to plaintiffs for repair costs, loss of business revenue and payroll loss. Plaintiffs entered into a construction contract to install a fire protection system for the Hotel Legado construction project. The fire protection system in the fourth floor electrical room allegedly discharged water in May 2010 and damaged four floors of the hotel. The plaintiffs alleged the defendant was negligent in the installation of the fire system and breached the contract, causing approximately $2 million in damages to clean up and repair the water damage.

Legislation

The governor signed into law in May 2014, certain amendments to statutes regarding fall protection. AZ LEGIS 119 (2014), 2014 Ariz. Legis. Serv. Ch. 119 (S.B. 1307) (WEST). Among other things, the amendments now require that an employer must provide fall protection as prescribed by this article for “every employee who engages in residential construction activities six feet or more above lower levels.” The exception for nonrepetitive work of short duration with limited exposure, where the hazards involved in rigging and installing the safety devices required exceeds the hazards involved in the actual construction, was removed. The legislature added in an exception for work where an employee is making an inspection before the start of actual construction work or after all work is completed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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